Apple’s Pain May Be Best Buy’s Gain

Apple just had one of the most profitable quarters in corporate history, and a huge year for profits and sales growth. But in the logic of the market, it’s upward trajectory is no longer as rocket-like as it once was: it’s hard to keep growing at the pace of an internet startup when you’re the biggest company in America.

In market language, “less great” is just another word for “down”, hence the sell-off in the company’s stock last week (it rose 2.5% today, retaking the title as biggest company in America from ExxonMobil). But something else is also going on: Apple competitors, led by South Korea’s Samsung, have closed much of the gap that once existed between the iPhone and every other device.

That is good news for retailer Best Buy, reckon analysts at BB&T. Their thinking, from a note released today, has two sides to it. Firstly, that Apple’s ascendancy has been worse news for Best Buy than many think:

We believe many investors underestimate the negative impact of Apple’s growing influence in the CE [consumer electronics] industry on Best Buy’s financial results the last few years. While Apple has been one of the few manufacturers to consistently introduce innovative new products over the last several years (e.g., the iPod, iPhone, and iPad), the company’s growing market share has hurt Best Buy in two ways: 1) Best Buy generates much lower profit margins on Apple products than on similar ones from other manufacturers; and 2) Best Buy must compete for sales with Apple’s highly developed brick-and-mortar and online distribution channels—which typically get much larger allocations of hot new products

So with Apple’s massive growth being relatively bad for Best Buy, the end of that growth spurt would be good news:

We believe Apple’s dominance has likely peaked and is beginning to recede, as evidenced by the company’s disappointing Q1’13 results. In addition, we think Samsung’s continued emergence as a strong competitor to Apple is a positive for Best Buy. For example, we note Samsung’s flagship Galaxy SIII smartphone has substantially narrowed the once very wide user experience gap with Apple’s flagship iPhone. In addition, we think Samsung demonstrated its ability to produce innovative products when it created the fast growing “phablet” category in 2011 with the introduction of the Galaxy Note.

All this comes as most analysts and investors are very negative on Best Buy — the stock is trading at a long-term low, relative to earnings:

BB&T

Other factors also play to Best Buy’s favor, the analysts said: the new management team and its track record of leading turnarounds at other businesses, the potential for cost cutting, and the likelihood that Amazon will soon be squeezed both by manufacturers pushing it to stick to recommended retail pricing, and state governments requiring it to collect sales tax.

Comments (5 of 6)

@bby leader . The company as whole needs to change. Newer "connected stores" are too expensive to build and have the same untrained staff that runs from customers. The chain needs to shutter the bottom third based on the P&L, save any good talent for the remaining stores and enforce retail basics: cleanliness, well stocked, staff that is interested in getting to the customer. Do those and send me a check - you will be back in business.

12:23 pm January 29, 2013

Some Guy wrote:

Dan...why would you expect to step into a RETAIL store and not see a RETAIL price? Commerce all over is changing and yes there are other options for buying out there but where is the line drawn so that both vendors and business stop losing money? The purpose of a business is to make a profit and selling below retail doesn't really help that cause. Just saying.

12:13 am January 29, 2013

a best buy leader wrote:

You sir are a very self minded person BBY has proven the fact they can run dry and they can move the market and take the beaten from almost all media.... step into a best buy connected store and be ready to say WOW

6:36 pm January 28, 2013

I Talk Crap wrote:

RIMM shill much, DayTrader? You're talking out your bottom, it seems.

5:31 pm January 28, 2013

DayTrader wrote:

Apple will be releasing a new cheaper line of phone(s) to compete against the likes of Samsung, Windows and the new heavy weight champ contender...RIM!

This is going to be very bad for APPLE as their 2nd quarter won't be too promising...even with the so called release of the iPANEL. Samsung is way ahead of iphone in the TV Market, plus they already make all their own parts and chips etc so if the iPANEL comes out...it will be over priced and definitely behind in technology. I have a feeling Apple stocks will take a massive dive close tot he second quarter at around the $300 mark.

RIM on the other hand can only go one way....UP! RIM has been spending all that down time perfecting a great new innovative product. I think Apple may have to wait on teh sidelines for a bit while they come out with something very innovative...they have the money to do it...but they don't have Steve Jobs. so we shall see! for now...it's safe to say that APPLE had their 15 minutes of fame!